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income which he is required to return, even though it
may still be claimed that he is not entitled to retain
the money, and even though he may still be adjudged
liable to restore its equivalent”. * * * [Citation
omitted.]
The requirement to report embezzled funds for tax purposes
even though the embezzler/taxpayer may not have had a claim of
right to the funds was analyzed in Yerkie v. Commissioner, 67
T.C. 388 (1976). In that case, an embezzler failed to meet the
first qualification of section 1341; i.e., the embezzler did not
have a claim of right to the embezzled funds. Id. at 392. We
agree with respondent that with respect to embezzlement gains it
is well established that section 1341 is not available. It does
not necessarily follow, however, that taxpayers with illegal
income, per se, are not entitled to use section 1341. With
respect to each taxpayer it would be necessary to decide whether
his circumstances meet the requirements of section 1341.
Embezzlers do not meet the claim of right requirement of section
1341 because there was no claim of right, not because the income
or gain was illegally obtained. Section 1341 applies only if the
taxpayer appeared to have an unrestricted right to the income in
the year of receipt. Sec. 1341(a)(1); sec. 1.1341-1(a)(1),
Income Tax Regs.
Here, petitioner’s and Mr. Lee’s activities were illegal in
every respect. Petitioner’s act of obtaining the insider
information, his sale of insider information to others, and the
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